Pumped up

The Middle East and North Africa region has over 40 percent of the world’s proven gas reserves and, with scope for new discoveries, it is set to play a pivotal role in the global LNG market. At the same time, domestic demand is burgeoning – fuelled by economic growth, low gas prices, and a gradual switch from oil to gas for power generation. As a result, some Middle East countries face natural gas shortages. This is the puzzle that needs to be solved.

Global gas demand is likely to grow by around 2 percent per year, probably for several decades. By 2030, we're looking at up to 4.5 trillion cubic metres (tcm) of gas per year, compared with 3.1 tcm today. That's a rise of almost 50 percent. Most of this demand growth will come from the electricity sector, where increased reliance on natural gas is an affordable and fast route to lower CO2 emissions. A modern gas plant emits only half the CO2 of a modern coal plant, and 70 percent less than decades-old steam turbine coal plants, of which there are still hundreds in operation in North America, Europe and China. Many of these will be decommissioned in the next five to 15 years.In deciding what replaces all that old coal capacity, governments and utilities are beginning to realise that natural gas capacity is both faster and cheaper to install than other new-build sources of electricity - and much easier to link into intermittent wind or solar electricity than either coal or nuclear.

Turn up the gas

In principle there's enough gas around. The International Energy Agency (IEA) in its latest Outlook speaks of total technically recoverable gas resources worth 250 years of current global production. It will cost a lot of money to get enough gas out of the ground. According to the IEA, to grow supplies by 40 percent over the next 20 years, cumulative global investment of some US$5 trillion will be needed (or US$250 billion a year). But to realise this, the industry will have to use an array of innovative production methods.Over the next decade, technological advances will further accelerate the expansion in unconventional gas production, which has already proved to be such a game-changer in North America. By 2020, our industry will be producing from shale gas, coal bed methane, tight gas and sour gas resources in a host of new locations beyond North America. To see the direction of travel, you only have to look at China. As China seeks to diversify its energy supply, the government has thrown its weight behind natural gas. It aims to more than double its share of the primary energy mix to around the eight to10 percent mark by 2020.

Tens of thousands of kilometres of new pipelines are planned. The result will be a more flexible and integrated gas market, allowing China to import more LNG, in addition to pipeline gas from Central Asia and Russia. China's annual gas demand - which stands at around 100 billion cubic metres today - is likely to double, and could even triple by 2020. As a result, China will likely overtake Japan as the largest gas market in Asia by 2015. LNG imports into China are likely to grow fast. To date, China has contracted some 25 to 30 million tonnes per annum (mtpa), and I expect that some 20 mtpa more will have been contracted within three or four years for deliveries later in the decade.

Developments in China are part of a broader story of rising demand for LNG.Despite the difficult LNG short-term market we have today, world-wide LNG demand is likely to grow - and grow much faster than overall gas demand. In fact, it could double this decade. This growth will be driven not only by China, but also by Europe's growing import dependency, and by a host of countries in Asia that will begin importing LNG, including Indonesia, Malaysia, Thailand, Singapore and Pakistan, and here in the Middle East, Kuwait, Dubai and Bahrain. And why this focus on LNG? It's because LNG offers unique supply security advantages because of its flexibility. Unlike pipelines, LNG ships can follow demand as it shifts and fluctuates around the world. Right now, supplies are growing at the rate of around six to eight per year, around three times the rate of natural gas overall. And the number of LNG exporters is likely to increase by nearly one third by 2015. So between now and 2030, the global natural gas story is one of surging demand, massive investment, tremendous innovation, and rapid globalisation of LNG.

MENA: the gas export opportunity

Where does this leave the Middle East? Three of the world's top four gas reserve holders are here: Qatar, Iran and Saudi Arabia. The Middle East currently supplies around a fifth of world cross-border LNG trade. And it is expected to deliver over half of new LNG supply to 2015, driven by growth in Qatar, Egypt and Libya and, in addition, nearly all new global GTL supply. Shell has been involved in the region's LNG exporting industry from the beginning. In 1964, the world's first commercial natural gas liquefaction plant came on stream in Algeria, using Shell technology. That same year, Shell undertook the management of the first two LNG ships ever built. My cousin was actually Chief Engineer on one of them, the Methane Princess. Today, we have involvement in around a quarter of the global LNG fleet.

In Oman we have been involved in exporting LNG as a partner in Oman LNG (OLNG) since 2000, and through OLNG as a partner in Qalhat LNG, a project that was added 5 years later, under construction management by Shell. Both projects have excellent track records. In Qatar, Shell has a 30 percent stake in a joint venture with Qatargas, known as Qatargas 4. LNG from the plant will go to China, Dubai and the United States. And we are working hard to send even more gas towards the East. We're also happy at our role working with the Qatargas transport company, Nakilat, in operating and maintaining their fleet of 25 new-built LNG vessels.

In Qatar, we are also building our flagship GTL (gas-to-liquids) project - Pearl GTL. When finished, it will be the world's largest GTL plant. Currently, more than 50,000 workers from 60 nations are at work on a site the size of 350 football fields, one of the world's largest industrial developments. Gas-to-liquids technology will take gas into new markets. Pearl GTL will produce enough GTL fuel to fill over 160,000 cars a day and enough synthetic base oil each year to make lubricants for more than 225 million cars. Last year, we secured approval for the use of GTL kerosene blend in commercial aircraft, only the fourth time in 100 years of aviation history that a new fuel has been so approved.

Shortly afterwards, Qatar Airways flew the first GTL-fuelled commercial airliner, from London to Doha, with paying passengers.In short, there are plenty of opportunities in the global gas market. But these global opportunities represent only one side of the coin. The other side is domestic demand growth in the Middle East itself. The region's strong economy is driving local gas demand higher. More gas will be needed for the switch from oil to gas in the power sector, for a growing industrial sector, and for injection into oil reservoirs to enhance oil recovery. As a result, the region's gas consumption is predicted to grow by about five percent per annum, similar to that of China, and twice as fast as that of the major European economies.

Which brings me to the question of how to solve the Middle East's gas puzzle of resource abundance, export opportunities and rising domestic demand.I believe the solution has three crucial elements:

• Increasing natural gas supplies through exploration and development;
• Expanding the region's natural gas and LNG infrastructure;
• Adjustment of the region's gas pricing policies.

One reason for the imbalance is that natural gas in the Middle East is not distributed evenly and a lot of it is difficult to access. Of the currently known accumulations totaling more than 70tcm (~2500 tcf), almost 80 percent is in two countries, Iran and Qatar. Of the remaining volume outside these two countries, around 70 percent is in associated gas accumulations. Associated gas is tied to oil production so its use is not flexible. If oil production quotas go down, then a country dependent upon associated gas can find itself gas short. 

Conversely, if oil production increases, that country must find something to do with the gas. This sounds like a nice problem to have but in reality it isn't so easy, as is evidenced by the amount of gas that is flared. There is of course real value in capturing associated gas instead of flaring it. Iraq is a case in point. We signed a provisional Heads of Agreement with the Iraqi Ministry of Oil in 2008, setting out the commercial principles to establish a JV with the aim of capturing and processing natural gas in southern Iraq that otherwise gets flared.

By end 2009, projects jointly executed by Shell and South Gas Company had already resulted in 135 million cubic feet per day of gas and 500 tonnes per day of LPG (liquefied petroleum gas) being gathered that was previously flared. Even before any binding deal was in place. This represents 20 percent of the currently flared gas, and over a third of the current Iraqi LPG import requirements. Gathering associated gas is important, but won't be enough to satisfy the region's long-term gas requirements.

From gas to liquid

The second element to solving the gas puzzle is to continue investing in the infrastructure that enables countries with a gas deficit to import their needs.In that context, LNG is an interesting option. By investing in LNG regasification terminals, countries can tap into the fast-globalising LNG market and diversify their gas supplies. Regasification terminals can be built rapidly, in three years or less. And thanks to the freedom of the seas they do not require the same bilateral agreements on which cross-border pipelines depend. Who would have predicted only five years ago that one of the very first LNG cargos from the Sakhalin II project in eastern Russia would be delivered to Kuwait?

Dubai currently has a regas terminal under construction and will probably be the second country in the region to import LNG. Bahrain is likely to follow. The Gulf region's market is attractive for exporters because of its anti-cyclical nature. GCC countries require LNG in the summer - for air conditioning and cooling - when demand in Europe and Asia is low. So in addition to finding and developing more gas supply, we need more investment in regional infrastructure, including and in particular for LNG.

A common factor to unlock both the domestic gas and LNG potential is the tricky question of gas price. Part of the reason for the gas supply challenge in this region is a history of low natural gas pricing. There have been times when regional gas prices were a fifth of the gas price of the UK and US, a tenth of gas prices in the Far East and less than one-twelfth of the energy equivalent price of oil. While the availability of cheap gas has helped drive industrial growth and keep inflation low, it has also encouraged relatively high per capita consumption of energy and water.

Some countries - mainly net gas exporters - can subsidise domestic gas with the income from exports. But other countries are only likely to attract imports at competitive export prices. So I'm not surprised that countries in the Middle East are increasingly seeking to develop energy policies that promote energy efficiency and conservation - as a way to keep open options for future generations. Part of such an approach could be for industrial users to pay gas prices that reflect the increasing cost of more difficult domestic gas production and the increasing proportion of supplies coming from imports.

Egypt has done exactly that: in May 2008, the Egyptian government announced an increase in the price of natural gas to energy intensive industries by nearly 60 percent. This resulted in significant cuts in the government's energy subsidy bill. As we look to the future, policymakers in the Middle East face a fascinating gas puzzle.The global gas market offers opportunities for exporters to capitalise on their resources. At the same time, there is a growing local market for gas. And a growing number of countries will have to increase gas imports to meet their domestic needs. Strong partnerships between NOCs and IOCs will be needed for deploying the technologies to increase domestic gas production. These partnerships will also be important in moving gas out of the region, into the region, or across the region, as LNG, GTL or through pipelines.

NOCs can benefit through these partnerships from existing positions of the IOCs in the gas value chain. But that in itself won't be enough: to fully realise the region's gas potential, it would help if gas prices began to reflect global trends. Natural gas is the cleanest-burning fossil fuel and has many other advantages that make it a highly attractive fuel for the electricity sector. These benefits of gas are important to policy makers in Europe and Asia, especially China, as they move to increase their countries' reliance on natural gas through long-term LNG supply deals. As the countries in the Middle East ponder their energy future, I am convinced that they will conclude that natural gas has many benefits and could change the region's energy landscape - and quite literally help clear the air.

This is article is based on a speech delivered at the Middle East Gas & Petroleum Conference in Kuwait.

Shell's major gas projects in the Qatar

Once complete, this integrated gas Pearl GTL project will be the world's largest plant converting natural gas in 140,000 barrels per day of clean-burning transport fuel and other products. It will also produce 120,000 barrels of oil equivalent per day of natural gas liquids and ethane. During its lifetime, the Pearl GTL will process three billion barrels of oil equivalent from the world's largest single non-associated gas field, the North field. This field, which stretches from Qatar's coast out into the Gulf, contains more than 900 trillion cubic feet of gas, about 15 percent of worldwide gas resources. Construction work began on the project in 2006 and has now reached the testing stage. Meanwhile, Qatargas 4 is Shell's first entry into Qatar's LNG sector. The project is 70 percent owned by Qatar Petroleum while Shell holds the remaining 30 percent. A single LNG train is expected to yield around 7.8 million tonnes of LNG per annum. Qatargas 4 LNG will be shipped to the Elba Island regasification facility in Georgia in the United States and to terminals in China and Dubai.

Number cruncher: Pearl GTL

2 million tonnes of equipment and materials imported to the Pearl GTL site

48,000 staff working on the project

At the peak of construction, Pearl GTL installed enough steel and pipes to build 2.5 Eiffel Towers every month.

The control room houses 1000 control cabinets hosting 179 servers programmed with 12 million lines of software code

The system is linked by 5850 kilometres of control cables which laid end-to-end would stretch from Doha to London.